Australian Industry Group (Ai Group) thinks the commission's expectation that 60 per cent of the car parts sector will survive is fanciful.

The new Productivity Commission report on the automotive sector seriously underplays the impact of the end of car making in Australia and should be treated with caution, Ai Group chief executive Innes Willox says.

"This isn't just another minor adjustment to the economy," Mr Willox says in a statement.

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"It represents the virtual closure of an entire industry. This will happen within a relatively short span of time and it will affect a large number of businesses, employees and communities."

The commission says $30 billion of taxpayer assistance to carmakers between 1997 and 2012 had only delayed the significant structural adjustment now facing the industry.

Australian carmakers were unable to survive in the highly-competitive global and domestic market, with Ford, Holden and Toyota all announcing they will cease local manufacturing by the end of 2017.

"It is estimated that up to 40,000 people may lose their jobs as a result of the closure of the motor vehicle manufacturing plants and the rationalisation of firms in the supply chain," the commission report says on Tuesday.

Mr Willox said that assessment, based on job losses for 80 per cent of the carmaker workforce and 40 per cent of the component supply chain, seemed optimistic.

The Federal Chamber of Automotive Industries estimates up to 90 per cent of the industry would close or move offshore.

Mr Willox says the commission's assessment that 60 per cent of component makers would be able to move into exports or other industries with no extra government assistance seemed fanciful.

"These markets are already crowded and are extremely competitive, with many auto components suppliers already operating in them," he said.

The assessment that two-thirds of the 40,000 retrenched workers would find another job seemed to be based on the experience of 700 Mitsubishi workers retrenched in 2004.

"This time around, there will be far more displaced auto workers in a very concentrated geography and with far fewer local alternative employment options," he said.

Labor industry spokesman Kim Carr said the real jobs impact would be closer to 200,000, not 40,000.

Hardest hit would be Victoria, where 100,000 jobs could be lost.

"Welfare payments and lost tax revenue from an industry shutdown are projected to exceed $20 billion and it will be more than 10 years before the economy recovers from the underlying hit to GDP," he said in a statement.

Federal Chamber of Automotive Industries chief executive Tony Weber welcomed the government's pledge that Australia would not become a dumping ground for other countries' second-hand cars.

The report recommended progressive relaxation on restrictions on imports of used passenger and light commercial vehicles.